Expanding the Saver’s Credit to Help More People
A few changes to the Saver’s Credit could have long-term benefits for lower-income workers.
The Saver’s Credit has been around since 2001 and is designed to help encourage lower-income workers to save for retirement. In short, the Saver’s Credit incentivizes workers to invest in retirement plans by offering them a tax credit.
However, over the last 20 years, it has helped very few people because of a number of restrictions.
Now, new proposals are gaining traction in Congress, which could dramatically increase the value and usage of the Saver’s Credit. We also designed our own proposal that takes the best from each to have an even greater impact, which you can find below.
Further, although the Saver’s Credit is a race-blind income-based program, our new paper finds that expanding the credit would also reduce the gap between what white families and Hispanic and Black families contribute to retirement accounts, which would, in turn, reduce the racial wealth gap.
The Saver’s Credit essentially provides a “government match” for lower-income households making contributions to their retirement accounts. The current program design can match as much as 50% of a worker’s contributions for a total credit of up to $1,000.
On paper, it sounds great for lower-income workers, but few people actually use the credit today for the following reasons:
1. The full credit phases out at extremely low adjusted gross income levels—$19,750 for a single worker in 2021.
2. The credit rapidly phases out, dropping to 20% and then 10% of contributions once a worker surpasses that already very low income level.
3. The credit is nonrefundable, meaning that workers with no tax liability cannot receive it.
Reforming the credit to be more impactful would require adjusting two key elements—the incomes at which the credit phases out and the rate of the phaseout.
Policymakers could also increase the total amount of the credit. Most important, making the credit refundable would get it into the hands of more people.
An additional reform that we feel is needed would be for employers to deposit the credit directly into workers’ bank accounts.
Three proposals to expand the Saver’s Credit have been introduced to Congress recently and could make a big difference to lower-income savers by addressing many of these same elements.
Senate Bill 1770 would increase the number of workers eligible for the 20% match to anyone earning between $19,750 and $26,500 as opposed to between $19,750 and $21,500 in adjusted gross income today. (This limit is doubled for married workers.) The Senate Bill would also make the credit refundable and deposit the credit into the worker’s IRA.
House Bill 8696, in contrast, makes the credit much simpler, 50% for single workers with less than $40,000 in adjusted gross income and a phaseout to 0% as incomes go from $40,000 to $60,000. (The phaseout is from $80,000 to $100,000 for married couples.) The bill also would increase the maximum credit to $1,500. The House Bill does not make the credit refundable, and our modeling reveals that, by omitting this piece, it does not have as much impact.
In the figure below, we model the effect of these proposals for the median workers by racial identification using the Survey of Consumer Finances. (See the paper for the full methodology.) Importantly, for our results below, we assume the House Bill would make the proposal refundable, because it does very little to increase savings otherwise. Our goal here is to illustrate different approaches to reforming the credit that would move the needle on savings.
A third proposal was formally introduced on Sept. 9 as part of Ways and Means Chairman Richard Neal’s markup of the “Build Back Better” bill. While similar to Morningstar’s proposal, detailed below, it additionally lowers the maximum credit to $500. We have not had time to fully scrutinize the effect this proposal would have, given this and other small differences, but our initial analysis suggests Neal’s proposal would limit the impact on the racial savings gap that we see with our Morningstar proposal--barring any changes in investor behavior.
By taking elements from the House and Senate bills, we designed our own proposal that we think would further enhance the impact of the Saver’s Credit.
In our proposal, we take the income ranges from the Senate Bill and the phaseout method from the House Bill, scaled to these ranges. In short, directing more of the benefit to lower-income workers has the maximum effect on the racial savings gap and would do the most to narrow the racial wealth gap.
Indeed, the combination of both proposals that we model would reduce the gap:
There are many other combinations worth considering, but the analysis reveals that there are enough lower-income minority workers who currently save enough to benefit from the credit to justify targeting most of the benefit to lower incomes.
- source: Morningstar analysis of the Survey of Consumer Finance.
Our model does not try to guess at how people might respond to this credit. Surely, however, some people would save more in response to a government match on their account.
This so-called dynamic effect could dwarf the initial estimates, particularly if employers did a good job of communicating these benefits to people.
In short, expanding the Saver’s Credit is a good idea to help close the savings gap. Like other proposed policies, it is certainly not a silver bullet, and it would come with a hefty price tag, but as momentum gains for its expansion, we offer this analysis as another piece of evidence that such reforms are a good idea.